The market is tough to beat

The great irony of Jack Bogle and the index fund is that he didn’t actually invent it. He did in the sense of turning passive investing into the product that now defines a majority of retirement investing, but the idea that the market was tough to beat had been percolating a decade before Bogle launched Vanguard.

The beginnings of the index fund are actually more embarrassing for the investment industry. According to Robin Wigglesworth at the Financial Times, Morgan Stanley originally commissioned the initial study of “total stock market performance.” The bank paid the University of Chicago $50,000 in 1960 to research the long-run performance of stocks. Wigglesworth writes, 

“Carefully collecting all the information needed ended up taking four years and costing Merrill about $250,000, but the result was sensational: A magnetic tape that if unreeled would stretch for over three miles, with conclusive data proving that the US stock market had returned 9 per cent annually between 1926 and 1960.”

That 9% was meaningfully higher (by nearly 2% annually) than the returns the mutual fund industry had posted. It appeared there was little merit in paying stock pickers. The study formed the foundation of the first actual index funds launched by Wells Fargo, Battermarch, and the American National Bank of Chicago. Those original funds were only available to pension plans. 

Jack Bogle brought the index fund to the masses with the launch of the First Index Investment Trust in August 1976. The product raised just $11 million, far short of its $150 million goal. Nonetheless, the product that would dominate investing for much of the American public began its rise to prominence.

‘Bogle’s folly’

At Basic Capital, we are interested in the initial rejection of Bogle’s innovation. What is now considered cost-conscious prudence was derided at the time on both practical and moral grounds. Edward Johnson, then Chairman of Fidelity, said, “I can't believe that the great mass of investors are going to be satisfied with just receiving average returns. The name of the game is to be the best." Some objections were more pointed, going so far as to say investing in index funds was “unpatriotic.” The idea was referred to as “Bogle’s folly” more than once. 

Critics worried about "free-riding," the idea that index funds benefited from price discovery without contributing to it through research and active trading. They also expressed concerns about reduced incentives for securities analysis and potential market concentration effects as passive strategies grew. In brief, most of the investment industry thought it was somewhere between a bad idea and outright irresponsible. 

On credit and financial innovation

We understand this reaction. When people learn about Basic Capital, they often ask, Isn’t that risky? What if markets go down? Will people understand it? These are fair questions, but they miss the most important one: why?

The answer isn’t about chasing higher returns; it’s about time. Most workers have roughly 30 years to build retirement savings. Early on, they’re contributing small amounts when their savings would benefit most from compounding. Later, when their wages are higher and contributions larger, there are fewer years left for that money to grow. The system is back-loaded.

Risk has always been part of investing, and it always will be. Markets rise and fall, sometimes sharply, but over long stretches patience is consistently rewarded. Time turns volatility from a threat into the very force that fuels growth for those who stay the course.

Bogle solved a major problem by reducing fees and avoiding chronic underperformance. But even index funds cannot change the fact that compounding requires time. 

This is where credit comes in. Credit makes it possible to shift money through time—allowing someone to invest more at the beginning of their journey, when compounding has the most years to work, in exchange for paying it back later when their income is higher. In other words, credit bridges the gap between when savers have the most time and when they have the most money.

Financing investments changes the math. It allows people to put meaningful capital to work earlier, giving compounding the decades it needs.

When ‘folly’ becomes wisdom

Jack Bogle’s contribution was not only about a new kind of investment strategy. It was about challenging a system that made investing harder than it needed to be. He gave ordinary people a fair chance to grow their savings. At Basic Capital we see a similar challenge.

Retirement saving is still tilted against workers because the most meaningful contributions often come late in life, when there is little time left. Our goal is to change that balance. By helping people put more money to work earlier, we give the time compounding requires. 

Markets will always rise and fall, but over decades, patience is rewarded. The real question is whether people get the chance to start early enough. Index funds were once mocked as 'Bogle’s folly,' financing retirement savings will one day be seen as the next overlooked idea that turned into common sense.